4. Excess capacity adjustments Aa Aa Water and Power Co. (W&P;) currently has $6

Question

4. Excess capacity adjustments Aa Aa Water and Power Co. (W&P;) currently has $645,000 in total assets and sales of $1,790,000. Half of W&P;'s total assets come from net fixed assets, and the rest are current assets. The firm expects sales to grow by 20% in the next year. According to the AFN equation, the amount of additional assets required to support this level of sales is W&P; was using its fixed assets at only 93% of capacity last year. How much sales could the firm have supported last year with its current level of fixed assets? O $1,924,731 O $1,636,021 $1,539,785 O $2,309,677 When you consider that W&P;'s fixed assets were being underused, its target fixed assets to sales ratio should be When you consider that W&P;'s fixed assets were being underused, how much fixed assets must W&P; raise to support its expected sales for next year? O $44,892 O $29,928 $37,410 O $31,799

Explanation / Answer

1)

=$1,790,000 / ($645,000 /2)*93%)* ($645,000 /2)

=($1,790,000/$299,925)*$322,500

=$1,924,731

Therefore, first option is correct.

2)

Targeted Sales Level = $ 1,790,000 * 120% = $2,148,000

Current Fixed Asset Utilisation =(645,000 /2)*93% =$299,925

Total Fixed Assets required for additional sales = Current Asset Utilisation Ratio * Targeted Sales

i.e., ($299,925/1,790,000)* $2,148,000 = $359,910

Hence, Additional fixed Asset Required are: $359,910 - $322,500 = $37,410.

Therefore, third option is correct

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